Market Abuse: A Reminder for Regulated Firms
What is Market Abuse?
The EU Market Abuse Regulation states market abuse is “a concept that encompasses unlawful behaviour in the financial markets”. The practice involves individuals and firms using market sensitive information and using the information to manipulate or gain an unfair advantage over the market. It is problematic because it damages investor confidence and the integrity of financial markets. Market abuse comprises of insider dealing, unlawful disclosure of inside information and market manipulation. The Market Abuse Regulation (MAR) (2014) was introduced to combat insider dealing and market manipulation in the EU and later, UK MAR (2020) was onshored after the Brexit transition period.
Collectively, the United Kingdom and the United States became more stringent with market abuse regulations and enforcement. In the UK, at the end of 2021, the maximum custodial sentence for individuals found guilty of insider dealing and market manipulation increased from 7 to 10 years. Likewise, between August and December 2022, the FCA ramped up its enforcement efforts by handing out nearly
Market Abuse Regulation
The FCA has not introduced any new market abuse regulations since UK MAR. However, firms should take note of the FCA’s guidance and learn from the failures of their competitors to improve standards and accountability in the financial market. FCA’s Market Watch 69 and 71 identified weaknesses in firms’ market abuse frameworks, including ineffective market abuse risk assessments, insufficient order and trade surveillance, vague policies and procedures, and inadequate insider lists.
For example, Citigroup Global Markets Limited was fined £12,553,800 by the FCA for failures in the detection of market abuse. The lack of trade surveillance requirement implementation led to the inability to effectively monitor trading activities for some types of insider dealing and market manipulation.
Additionally, Sigma Broking Limited was fined £531,000 by the FCA last year, following market abuse reporting failures. As a result of inadequate governance and oversight by the company’s board of directors, it was discovered that the company, between December 2014 and August 2016, did not report or failed to correctly report 56,000 contracts for difference (CFD), and failed to detect 97 suspicious transactions or orders that should have been reported to the FCA.
To address these weaknesses, firms should periodically undertake high-level market abuse risk assessments, monitor orders and trades effectively, maintain well-documented policies and procedures, and ensure insider lists contain required personal information beyond names.
Nonetheless, on 01 February 2023, HM Treasury released a consultation focusing on bringing the future UK regulations for cryptoassets within the framework of traditional financial services. Some of the proposals include making civil market abuses offences similar to those under MAR and requiring firms to disclose inside information and maintain insider lists. The consultation acknowledges the difficulties and challenges of effectively policing the conduct, nevertheless, it is a step in the right direction to stop some of the abusive practices that encompass the cryptoasset realm.
What does this mean for regulated firms?
- Policies, procedures, systems, including market risk assessments should be appropriate and proportionate to the size, scale and nature of the business activity;
- Trade surveillance should cover the full range of trading activities taken and asset classes traded;
- Gap analysis should be conducted on the adequacy of automated surveillance systems as well as manual processes in identifying market abuse. Where weaknesses are found, firms need to consider how to remediate them. Effective and comprehensive training should be given to staff involved in the monitoring, detection and identification of orders on at least an annual basis.
Ultimately, the FCA highlighting key themes regarding market conduct and the UK government enhancing the scope of the market abuse regulations coincides with the FCA’s 2022 – 2025 Strategy, with one key area of focus being “delivering assertive action on Market Abuse”. It is unsure whether this more assertive trend by the FCA will continue into 2023, however, if 2022 is anything to go by, there is no doubt the FCA will be busy with enforcement in 2023.
How Can Complyport Help?
If you have any questions about the UK MAR, or you think your firm may require assistance with a gap analysis, review of your policies and procedures and systems related to Market Abuse compliance, please contact Jan Hagen via firstname.lastname@example.org to book a free consultation.
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